There may be a recession sometime in the next year. There again, there may not be. It is interesting to examine how the different economic classes will react.
Let us examine the ‘plight’ of the wealthy, those with significant means. Let me remind you how they managed during the Covid recession. Research suggests that in the 48 weeks from March 2020 to February 2021, a period during which millions were suspended from work, the wealth of the wealthiest increased by over 40%, over $1.3 trillion. (COVID-19 has made the super-rich richer. It is time for a billionaire wealth tax - Resilience) The impact might have been different in the ensuing months but no, luxury items continued to be purchased in record amounts. You need only look to premium auto sales (Lamborghini and Bentley rack up record sales in 2022 - Autoblog) or haute couture (New record year for LVMH in 2022 - LVMH)
It is fair to say that the wealthy do not have any appreciation of a recession. Preparation is limited to ensuring that the wine cellars are fully stocked and that the private planes are fueled and ready to head to a warmer destination.
And in case there is any concern about cash flow, they can always rely on Boards of Directors such as that at Chevron who chose to authorize a stock buyback worth $75 billion to support the stock price rather than issue a special dividend which might have tax implications. It is good to have friends in high places...
Consider the plight of the poor. These folks rely on government assistance for much of their income, as spartan as it may be. Most who are employed work for minimum wage in service or hospitality sectors and visit food banks for supplemental assistance. In the event of a recession, they are the ones most likely to be ignored or forgotten. They fly under the radar economically. They have no friends in high places. A recession has the potential to make life more difficult but when you are functioning at that level most of the time anyway, it becomes worse only by degree. What is one more can of water to the soup that is already diluted...
That leaves us with the middle class. They are the ones with the target on their back during every recession. The typical remedy has been to initiate layoffs. And it is such a waste of time...resources...and emotion. Layoffs are simply an admission of lazy and lousy leadership. I call it the ‘chicken little syndrome’.
To fully understand why I make this comment, consider the following:
Recessions are a normal part of the economic cycle. Since 1950 we have had anywhere from 11-13 depending upon the definition you choose.
Recessions last on average about 10 months. They are a result of war, disease, or greed. The true impact on GDP has been a decline in the range of 2-3%. As often as not, we have already started to come out of a recession just after economists declare us to have been in one.
Look at any graph showing GDP growth over the past 75 years, and you will notice one thing...the graph always continues to move up after short and nominal periods of decline.
It begs the question ‘...why do we overreact to the normal cycle of business and worsen a situation that is going to correct itself in the near future?’ The answer is simple. To appease the wealth holders, those who own the stocks, leaders have been conditioned to conduct knee-jerk reactions to imply that they are on top of the situation and doing what is necessary to protect share value. As I have already noted, layoffs are the remedy of lazy and lousy leadership. And the wealthy do not need to be pandered to, they are doing just fine thank you.
Layoffs are costly; they undermine employee morale; they are insensitive to the fact that you are burning an asset that will be needed again in the future and which will cost more than you have saved once you factor in the recruitment and training costs and the erosion of trust among those who remain.
Is there ever a time when layoffs are necessary? Absolutely! They are a tool to use when a business faces fundamental challenges in their marketplace and for which the future is decidedly uncertain. A recession is not an indication of this situation.
We are always in uncharted territory. No one knows the future and we are all in a reactionary mode. That said, we do have some certainties.
Every day in North America there are about 11,000 baby boomers turning age 65, the traditional age of retirement. This has been happening for over a decade and will continue through this decade. We have an exodus of high wage earners and a knowledge base that we need to transition.
Demographics will play an increasingly vital role in economic growth. Countries like Japan have already come to the tipping point caused by low birth rates and restrictive immigration policies. China is about to feel the impact of decades of selective birth rates both in terms of numbers of people and of gender. And because no one has yet been able to figure out how to reduce the length of a pregnancy, these issues will not go away quickly.
People have always been the primary differentiator between the best companies. Ideas can be copied quickly, and regulators hate monopolies so there are few lasting advantages associated with technology.
As you assess your response to the potential or reality of a recession, what will be foremost in your mind. Will you retain your most critical assets and be able to capitalize on the opportunities that a rebounding economy presents? Or will you succumb to the tried and true – and failed – approaches of the past? I wish you the best in your decision.
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